BEML racing ahead on high hopes

Expected boost to mining, defence, construction, infrastructure and railways sectors will boost fortunes

The optimism on economic recovery and revival in construction, mining and infrastructure activities have helped reverse BEML's fortunes on the bourses.

From sub-Rs 200 levels in early March 2014, the company's stock now trades at Rs 762 levels. The expected PSU reforms and better operational performance, led by cost controls measures undertaken by the BEML management have also helped boost the investor confidence. For FY14, BEML reported a consolidated profit of Rs 6 crore after reporting its first-ever loss in over a decade in FY13.

Going ahead, the revival of the mining industry remains crucial for BEML and the country. While mining ban in Karnataka, Goa and Odisha has hurt the steel industry and prospects of mining equipment makers like BEML, the slower ramp-up of coal mines also suggests that gains in the near-term will be gradual in the mining equipment business.

Chirag Shah at Barclays feels that it is high time that India addresses the issues of the mining sector. The sector's GDP contribution has dropped from four per cent in 1994 to an estimated two per cent in FY14 and the sector's current account deficit has increased to $26 billion. With the government trying to fast-track mining projects, analysts are hopeful of activities gaining momentum in this sector.

It is not only mining activities that is crucial for BEML but evacuation of the produce for which railway infrastructure is to be upgraded. And, it is not only railways and freight corridors but other rail infrastructure and metro projects are also expected to get a push. These will benefit BEML, which gets over 80 per cent of its revenues by manufacturing equipment for mining and construction and rail and metro sectors.

Analysts at Religare Capital Markets observe that India is expected to become the fourth largest marketplace for construction equipment, only behind to China, North America and Europe. Given the scope for massive infrastructure spending, construction and mining equipment-makers expect to grow at 20-25 per cent CAGR over the next seven years led by higher urbanisation and impetus to large infrastructure projects. The defence sector also is expected to get the bounty and this again bodes well for BEML, which is among leading equipment suppliers to the Indian Army.

While the positives are likely to accrue and BEML's prospects are getting stronger after the strong rally, the stock might not move up in a hurry. In fact, one will have to gauge the boost that sectors such as railways, defence and infrastructure get from the government. Valuations have also turned expensive with the stock now trading at 1.6x FY14 book value versus just 0.6x in March -currently, it is trading at a PE of 33.6x based on FY15 estimated earnings. Though operational performance is improving, earnings need to catch-up.

Misal Singh at Religare says stocks in the sector factor in most of the positives and therefore he did not see much upside in the next six months.